Safety Net or Windfall?

In his 2010 State of the Union address, President Obama urged Congress to change the federal student loan program’s existing Income-Based Repayment (IBR) plan, which caps borrowers’ payments at 15 percent of their incomes and forgives any remaining debt after 25 years of payments. He argued that high college tuition was an untenable burden for the middle class, and that by reducing payments to 10 percent of a borrower’s income and providing loan forgiveness after 20 years of payments, lawmakers could provide borrowers with relief.

Congress enacted this proposal two months later, but limited it to students who take out their first loans on July 1, 2014 or later. Then, in 2011, the Obama administration announced that it would make this plan available sooner—to borrowers who took out their first loans in 2008 or later and took out at least one loan in 2012 or later—and that eligible borrowers may be able to enroll by 2012 if regulations are finalized by then.

The New America Foundation developed a calculator to examine how the pending changes to IBR will affect different types of borrowers. We analyzed hundreds of scenarios for different borrower profiles. But contrary to benefitting low-income borrowers, the pending changes to IBR will actually provide generous benefits to borrowers with higher federal loan balances – those with graduate or professional degrees. A borrower with an MBA or a law degree can easily have a six-figure loan balance forgiven, even if his income exceeds $100,000 for much of his repayment term.

The U.S. Department of Education plans to finalize changes to IBR — lowering student loan payments from 15 to 10 percent of a borrower’s discretionary income and accelerating loan forgiveness from 25 years to 20 years — by the end of the year. The report, “Safety Net or Windfall? Examining Changes to Income-Based Repayment for Federal Student Loans,” provides unique insight into the intricacies of the upcoming IBR changes and their unintended consequences. It also recommends changes that policymakers should make before the new IBR program takes effect to better target its benefits to borrowers with lower incomes, rather than high-income borrowers with graduate and professional degrees.